Howell: Big technical breakout lifts cotton market to 12-week high

An impressive technical breakout from a contracting price pattern of lower highs and higher lows has powered cotton futures to a 12-week high.

Benchmark December advanced 498 points or 7 percent for the week ended Thursday to close at 75.95 cents. It hit a high of 77.07 cents, up 9.8 percent from the low a week ago and its highest mark since May 16.

The breakout preceded updated U.S. and world supply-demand estimates that were scheduled for release by USDA on Friday. March gained 448 points to settle at 76.65 cents.

December traded to within 40 points of March as certificated stocks continued to dwindle, falling 5,523 lots to 30,526. Open interest in December fell 950 lots to 132,967 but rose by 2,989 lots across the board to 181,010.

It was just a matter of time before the market broke out either to the downside or the upside, a trade analyst had commented. Support for December now is seen from 70 to 73 cents and resistance from 77 to 79 cents.

Cash grower-to-business trading edged up to 8,172 bales from 8,091 the previous week. Prices climbed to an average of 70.59 cents, reflecting a rise to 17.30 cents from 16.81 cents in premiums over loan repayment rates. Daily price averages ranged from 68.36 to 72.67 cents.

Constructive U.S. export sales and shipments, deteriorating crop conditions in Texas, ongoing concerns about dry weather in parts of India, declining stocks in deliverable position and reinforcing positive technical factors contributed to the futures rally.

Net export sales totaling 137,000 running bales during the week ended Aug. 2 for shipment this season featured broad-based distribution to 20 countries. Commitments for 2012-13 reached 4.287 million running bales, including carryover sales from 2011-12 of 1.246 million.

All-cotton shipments of 167,300 running bales boosted cumulative exports for the 2011-12 marketing year ended July 31 to just more than 11.452 million running bales. In statistical 480-pound bales, this indicated exports totaled almost 200,000 above the USDA July estimate.

Net sales of 31,500 running bales were reported for 2013-14. The December 2013 contract rallied to 80 cents on Tuesday and closed at 79.08 cents, up 274 points from a week earlier.

Cotton rated good to excellent fell three percentage points during the week to 41 percent, fair dropped two points to 32 percent and poor to very poor rose five points to 27 percent, USDA reported.

Conditions declined sharply — the most of any state — in top-producing Texas, falling 10 points to 24 percent good to excellent and jumping 10 points to 41 percent poor to very poor.

Some analysts questioned whether the USDA National Agricultural Statistics Service survey for the August crop estimate would fully reflect current conditions in Texas. Ratings declined slightly in Arkansas and Mississippi, skidded in Oklahoma and improved in Alabama, Arizona, Louisiana, North Carolina, Tennessee and Virginia. Conditions held steady elsewhere.

Boll opening at 9 percent was even with last year and ahead of the five-year average of 7 percent, while boll setting advanced 15 points during the week to 74 percent, same as a year ago and up from 70 percent for the average.

Squaring cotton rose five points to 98 percent, also even with last year and four points ahead of the average.

Globally, output is forecast down 9 percent from the prior year to 24.74 million metric tons, the International Cotton Advisory Committee said in an updated report ahead of the USDA data.

World mill use is projected to increase only slightly to 23.17 million tons. The rate of global economic growth is expected to remain slow and the high domestic cotton support price in China is encouraging mills there to shift to alternative fibers.

The overproduction of 1.57 million tons would push global stocks up by 11 percent to 15.19 million tons.

However, Beijing announced a slightly higher minimum support price for 2012-13 and is expected to buy a large portion of the new crop. This suggests the size of the Chinese national cotton reserve may continue to increase.

With much lower imports of 11.6 million tons foreseen by China, global cotton trade is expected to fall by 20 percent to 7.5 million tons, ICAC said. However, imports by countries other than China could grow, driven by lower cotton prices and slightly higher consumption.

Meanwhile, trend-following funds sold 3,948 lots in U.S. cotton futures with options during the week ended July 31 to reverse to net short a light 255 lots from net long 3,693 lots, according to the Commodity Futures Trading Commission. Subsequent buying attributed to hedge funds indicated they had covered shorts and reversed back to net long.

Index funds sold 252 lots to shave their net long position to 68,376 lots, while small traders with non-reportable holdings sold a net 1,781 lots to flip to net long 318 lots from net short 1,463 lots.

Commercials bought a net 2,417 lots to reduce their net shorts to 68,440 lots. They increased longs by 4,443 lots to 59,852 and shorts by 2,026 lots to 128,292.